Thursday, July 06, 2006

My final word on bread and circuses, New Space style

While it has been an "enlightening" conversation of late, regarding the philosophy and economics of that-which-we-will-NOT-call-spaceports, it has reached the point where there is a definite risk of going around in circles (as NASA has for decades) to a place of marginal utility. So I purport to make my final case here, then move on to other topics, as there are so many to discuss in the kool-aid universe.

I also find it interesting that someone who admits to "not being a rocket scientist" - and presumably not an economist, academic, investment manager, or serial entrepreneur, either - attempts to "defend" the efforts of people like Peter Diamandis, Eric Andersen and Sir Richard Branson, without any real knowledge of their personal or business motivations for doing what they are doing. (In fact, if I were they I would not presume the need for such a defense, and would say so in no uncertain terms.)

Having said all that, I believe there is only one place where or New Space, as it were, can truly add value and make the ultimate human expansion into space possible, and that is "CRATS": Cheap and Reliable Access to Space. If that is not achieved, all the theme parks in the world will amount to nothing. I also submit that building lots of "spaceports" without certified "spaceships" to fly out of them on a regular basis could ultimately backfire on promoters and their investors. Those investors - assuming they're private - will be loathe to invest again, the industry will fail (again) to gain credibility, and yet another generation's time and energy will have been wasted going down a false road.

I'm 52 years old. I've already waited over 30 years for CRATS - if I have to wait another 30 I'll be investing in biotech and nanotech (but NOT!) simply to keep me alive and healthy long enough to finally see that day. (There are people who insist that the technological capability for CRATS is already available, and it's just a matter of getting rid of what is perceived as political, bureaucratic and budgetary constraints - but that is a topic for another series of posts - for now I'll just refer you to what I call the "three doctors paper".)

Moving on, I have to say that this quote floored me:

"But I don't see how theme park spaceports can hurt provided we do not expect too much from them."

[snark] Yes, "Mr. Bill"...I'm certain Diamandis, Branson and Andersen said that very same thing in their business proposals to take taxpayer's money in NM, Dubai, and Singapore [/snark].

But seriously - I'd bet potential investors in those theme parks - taxpayers in particular, who are involuntary - have a LOT of expectations for them, based on the hyperbole being pitched by the promoters themselves. They have been told to expect oodles and oodles of money flowing in through lots of repeat business.

What is the promoter's and pol's plan to pay back the tax money to the people being forced to subsidize these operations? There isn't one, because being a taxpayer means never having to receive value for their money, and being the politician who spends it means never having to apologize to them for throwing it away - they instead try and use it as a lever to higher office. (NM Gov. Bill Richardson, in particular, has Presidential aspirations, or so I've heard.) They just wave their arms and claim all that increased tourist activity will magically generate lots of taxable income to more than make up for the tax dollars being re-routed from other programs. That's going to be a big issue in NM in particular, which is technically one of the poorest states in the US. I haven't seen a definitive study verifying this, however.

No, going back to an earlier analogy, we should forget Tin Cup (which was an eminently forgettable film, in any event), and look instead at a Kevin Costner classic that unfortunately fits the world all too well - Field of Dreams. Most New Space companies' business plans are distilled directly from the major tagline from that film: "If you build it they will come". Even the most optimistic prognostication from the Futron study stated that, 15 years down the line, they, in fact, would not come, at least not at a rate sufficient to keep even one dedicated launch facility going at the level of the smallest terrestrial airport capable of handling a 737 or better.

"Mr. Bill", however, continues to insist that these very low flight rates don't matter - it's just the entertainment value that counts, and that's what will (somehow) keep people coming, to ultimately subsidize further R&D and pay back the poor taxpayers of NM. It ain't necessarily so. Let's go back to school, specifically Econ-101:

All risk capital - even capital stolen from taxpayers - has both an intrinsic and opportunity cost associated with it. The intrinsic cost is either straight-up interest for a banker, Return On Investment for venture cap, or net tax dollars funneled back into the system via increased taxable economic activity at the site - in the hopes that more comes in, net-net, than was spent out. The opportunity cost is an analysis of how well one might do investing in this particular opportunity as opposed to other competing opportunities, i.e., "what else may I be missing out on?".

The amount of capital out there - whatever its source - is limited. There is competition for that capital by businesses large and small who already understand how to turn a decent buck in established growth industries. If I have $100 million to invest, and I have to choose between a space theme park and the next generation microprocessor which has 100 times the speed at one tenth the heat output, what do you think I'll pick? A veritable minefield of a new industry with no track record and fraught with unknowns, or something where the market, customer base, and path to profitability is well understood?

Five so-called "spaceports" are being built when not a single commercial spacecraft has proven itself, let alone received an AST launch license. If you stick with the theme park business, however, you're now back in the Real World, a la The Matrix; in other words, you now find yourself in heavy competition with a LOT of other theme park chains who have have their marketing turf staked out quite well, not to mention cheaper rides. While there may be a lot of traffic initially due to the "novelty" value, it going to take a lot more than "build it and they will come" to keep customers coming back. Why? Because theme parks suffer another challenge: "seen one, seen 'em all". It costs a lot of money, creativity, and advertising to keep things fresh and tourists encouraged to return. Kids in particular outgrow things quickly.

I haven't been to Disneyland since I was 17, and was forced to shepherd my sister around. I took my daughter to Hershey Park when she was 12. Now she's 17 and would rather drive to Idaho with her friends to see the Red Hot Chili Peppers concert. Theme parks? Mickey Mouse? Fuhgedaboudit. Experiencing space tourism from the sidelines, which is what this is, will, like extreme sports, be done once or twice for the experience. Then, "Mr. Damn, Mrs. Damn and the whole Damn family" will go find something else to waste their 2-week vacation on in future years. The more adventurous will eventually tire of watching things from the sidelines, and will grow frustrated that the costs of the Real Thing haven't come down far enough to get within the Damn Family's budget.

Can the "Rocket Racing League" generate the interest, crowds, ad revenue and aftermarket sales as NASCAR? I will submit a qualified "no", for one reason - you can drive a NASCAR vehicle yourself, or mod something similar in your own garage, if you have the tools and desire. Ergo, people know they can go along for the ride if they wish, but are content for now to live vicariously through Dale Earnhardt, Jr. How many people will be building rocketplanes in their backyards? There is an initial "ohhhhh-ahhhh" factor, but it will once again wear off, just like Apollo and the Shuttle, as people realize this will never apply to their own lives and within their own budgets, any time soon. The "qualification" however, is that it's probably not the promoter's primary goal to make as much money/recognition as NASCAR does - perhaps only a small fraction will suffice to keep interest up, and development/sponsor dollars coming in.

Given that theme parks may not make the tourism itself definitely won't drive enough traffic soon enough to make a again, why is all this necessary, and how is it going to pay?? And before anyone tries try to lecture me that some taxpayers are in favor of subsidies to businesses - like building new ballparks to keep the major league team in town - those voters actually had a say in the matter on an actual bond issue at the ballot box.

Again, quoth Mr. Bill: "...should we hold Diamandis and Branson to a higher ethical standard than the NBA, NFL and major league baseball?"

Well, perhaps we should, actually(!) - but more to the point, the taxpayers themselves are now holding their own city governments to a higher standard. In the late 1980's, the owner of the San Francisco Giants, Bob Lurie tried twice to convince the voters of that fair city to subsidize the construction of a new ballpark at China Basin. The measure failed both times. But despite veiled threats, the Giants never left town. Ultimately a new China Basin ballpark was finally built, in 2000, but using private money. This has now become a curse for other baseball franchises seeking taxpayer help to build new ballparks in their towns.

However, nothing is mentioned about public plebiscites in any of the currently proposed "spaceport" areas.

The last thing that I thought was a bit over-the-top was this line: "...doing a makeover of a Lear-jet so it can fly in space is wicked cool...but no one should pretend that a made-over Lear-jet is on the critical path to anything more significant than an awesome episode of Monster-Garage."

That statement is just so wrong on two fronts: (1) the people at Rocketplane, who are leveraging millions to make their vision a reality, may not think of their efforts in that vein (and, like Peter D. and Sir Richard, may not appreciate someone like this as a self-appointed defender); and (2) we shouldn't think of anything in this area as "wicked cool" until the builders have proven it won't wickedly kill people right off the tarmac. Hyperbolic press releases notwithstanding, rocketry is a dangerous game, with a very real risk that someone will get maimed or killed in the process. Death of paying customers in a fireball or a crumpled fuselage is not "wicked cool", especially if one of those customers is friend or relative of yours.

Those promoting and attempting to build these theme-park-hybrid-space-carnivals may succeed very well, and God bless 'em if they do. They will take whatever tax subsidies they can get, as that is free money, and they have no responsibility to those taxpayers once the thing is built - if the traffic and increased tourism doesn't pan out in the long run, the pols will take the heat, but the promoters will cash in - maybe.

However to me, such projects are nothing more than a bread-and-circuses distraction. I'll probably be a customer myself this year, at XPrize Cup - nevertheless, I'm not in any way convinced these projects will seriously do much to help make CRATS a reality - and CRATS will be the only real legacy of New Space that will be worth writing about, to future historians. Fail in that, we fail everybody.


Blogger Shubber Ali said...

It's not our job to tell people what they should start companies in.

What we are attempting to do is give them the critical analysis tools they need so they don't waste time setting up companies in kool-aid stands.

We also endeavor to help the potential future kool-aid stand investors recognise the sugary substance for what it is - and if they still wish to invest, it's their coin.

Thursday, July 06, 2006 8:30:00 PM  
Blogger TomsRants said...

(*wheeze, pffffssst*....the Force is strong with this one...)

Score one more for the skeptics. (Hey, c'mon...after writing over 1000 words on this topic, I'm entitled to a cheap laugh, aren't I?)

Friday, July 07, 2006 1:42:00 PM  
Blogger TomsRants said...

I note SpaceX is expecting to be cash flow positive for this year, and yet is still to have a successful launch – just what market signals is that sending…

That is one of the more interesting challenges in trying effectively be a business analyst for New Space, as none of the players are public companies, and thus have no SEC reports available in the public record. Players other than Musk, Carmack, Allen and Bezos (who are clearly self-funded) are very secretive regarding their plans, operating budgets, income streams (if any) and angel/VC funding sources. (A couple outfits of won't let you use their toilet without signing an NDA! LOL) Your only resort is to talk to a lot of people, people who know other people, and read between the lines frequently, as there is so little else to draw from in terms of overall track record. Ergo, what SpaceX says it "expects" and what is real is subject to extreme speculation, and we may never know the complete honest truth - it's all in how one does the accounting.

Having seen a lot of firms come and go, and far more investor money lost than earned thus far, one also becomes very skeptical of fanciful PowerPoint shows and hyperbolic press releases. I really support what Elon is doing, for example, I think he has a real shot - but even I had to raise eyebrows when he began cranking out press releases for Falcon 9 and this new reusable capsule, when Falcon 1 has yet to fly. Fly Falcon 1 ten times, sucessfully, and get paid for them. Then fly Falcon 5 two or three times to show they mean it...then when talking about F-9 and capsules, I might be more willing to leave my skepticism at the door.

Saturday, July 08, 2006 4:18:00 AM  
Blogger Ray said...

Well, this is a good topic, and I'm glad the Space Cynic raised it in this way. The spaceport folks definitely need to make sure they have a good business plan with appropriate levels of risk. From the point of view of a state government, they may be happy enough funding work that will be done in-state, with in-state workers, building in-state businesses, designed to draw tourists from in and out of the state to do business there. The image of the state as being on the frontier again (eg in the case of NM), and the synergy with existing space-related sites (VLA, White Sands, others) may help them make the case (although these sites are spread out). They may never know how much business the spaceport drives - noone polled us on our NM trip to ask why we were in the state for a couple weeks going to restaurants, driving rental cars, buying museum tickets and souvenirs, paying for hotels, etc. I don't think any of it looks like space-related business.

I don't see any problem mixing actual flights with ground activity like spaceport T-shirts or coin-operated telescopes to get a better view of flights or whatever. The flights are being marketed as space *tourism*, after all. It seems a perfect match. I used the analogy of a shopping mall anchor tenant for the actual flights. Another analogy that comes to mind is a seaport, or tourist "seaport". I'm thinking about a Baltimore Inner Harbor, a San Francisco Fisherman's Wharf, or to be a bit more realistic a similar operation outside the city (a small resort port). You may have an expensive boat tour for the tourists. You will also need to have the trinket shops, suntan lotion sales, etc. In-between, you have activities related to the port-ness of the place, but cheaper. You have paddle boats, personally-owned boats, water taxis, a beach, some smaller tour boats, a maritime museum, Grey Lines Tours with all-day trips to Wine Country or Santa Cruz, an acquarium, a boardwalk, and so on. Can the analogy work? If it helps justify the spending on the "real" infrastructure of the port needed for the flights, and it gives educational and entertainment value to the customers, and it helps some little space companies get some practice with real flight operations and real businesses with real customers so the best of them can make it to the next level, it sounds good to me. That's why the prospect of less-ambitious fights like rocket racers, Virgin Galactic's chase plane tourist flights to watch the main flights, and parabolic flights seem more important to me than they might at first. There might be a lot of similar opportunities for less-ambitious (than actually reaching space) space-related flights that don't cost a lot. Right away the idea of flights that get very high, but not to the edge of space, comes to mind. Some space addicts who can't afford to reach the edge of space might want a ride on the carrier plane of an air-launched operation (presumably on its day off). How many people can say they've ridden such a thing now?

A site in the middle of the desert might make it tricky to get the crowds, but I may feel differently about that in January. Anyway, you don't need Disney levels of traffic. 100 out of state tourists per day, spending 1 week and 1,000-3,000 per trip in the state, sounds like a good start for helping justify the state's expenses (in terms of not just tax revenue but also happy businesses), if you can supplement that with a few "crowd-drawing" special events per year.

One big question is how this will all be presented in the media. If the ships and ports get built, will they be able to advertise it skillfully and get free and favorable media hype? Will the actual start of business operations change the market? Will golf partners start talking about how great the trip was, or how it was a waste because they were sick the whole trip? Will the perception of the general public change from disapproval of tourist rides to seeing these as pioneering flights? What about celebrities that go on flights - will they give their seal of approval for their fans?

I'm also interested in the 2nd round of tourist ships and operations, should the first thrive. Will they be able to improve operations and lower ticket prices more? Will the experience get better (better views, longer flights, more room, safer)? Will more passengers fit per flight?

What about firsts? Will there be a first marriage in space on one of these flights? Will there be a kind of contest to see who gets in the record book for the most flights? (pilots excluded?) Will some web site be made to track all of the spaceflight tourists that want it, and make they first few thousand celebrities of sorts (potentially for thousands of years)?

What about non-tourist business for the flights? Will news organizations pay to get their journalists on flights? What about other organizations getting their employees on flights? Will NASA astronauts get any benefit from going on the flights? Will there be business launching experiments or doing remote sensing or reconnaisance?

I wonder what the spaceport blogger would say about all of this?

The bottom line is that the Space Cynic is right about the difficulty of succeeding at this kind of thing. All involved will need to work hard, look carefully at their business cases, and learn from the history of similar businesses.

Saturday, July 08, 2006 5:54:00 AM  
Blogger Shubber Ali said...

Follow up - isn't it better for XCOR to work on this project using funds furnished by the Rocket Racing League rather than;

(a) An angel investor funds R&D in the pre-revenue stage of operations, or

(b) NASA issues a cost-plus procurement contract?

Which raises two questions:

where does RRL get their money to fund these projects?

how do they select between one company and another as recipient of the funds? (or are you assuming they are sitting on piles of money?)

Friday, July 14, 2006 4:48:00 PM  
Blogger Paul D. said...

There is competition for that capital by businesses large and small who already understand how to turn a decent buck in established growth industries.

An example of this springs to mind when space promoters. exploiting the current energy problems, try to push space solar power: the internal rate of return on a 20,000 barrel/day Fischer-Tropsch coal plant in Wyoming, at current diesel prices, would exceed 100%/year.

Sunday, July 23, 2006 7:40:00 PM  

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